The Coming Collapse of Income Tax A System on the Verge of Self-Destruction

Within the next ten years the income tax system in the United States will be dismantled. A number of emerging new forces coupled with the universal dislike of the system will soon gain enough of a toehold to cause it to collapse. State income tax systems will be dismantled either shortly thereafter or at the same time. It is a system that has mushroomed out of control, and few will mourn its parting.

The current tax system is deeply entrenched in our society. Many industries rely on tax filings for verification of income, statistical information, and research data. Social security is inextricably linked to income tax and state income tax systems are closely modeled after the national system.

The transition period will be difficult. Many of the people who currently live off of the system will find themselves out of a job, needing to transition to another line of work. And the business world will be forced to rework their ways of doing business.

While a new tax system will need to simultaneously emerge in its wake, the exact form of the replacement system will depend on the political party in power at that time. Many new taxation models will emerge as the end of income tax becomes more certain. Here are the top ten reasons why the income tax system is on the verge of self- destruction, and possible trigger points which will force the change to happen.

1.) The Exponential Nature of Complexity It can be argued that every major civilization in history has fallen because of unsustainable levels of complexity. In major civilizations such as the Egyptian, Greek, or Roman empires, as well as in smaller civilizations like the Mayan Indians and Mesopotamia, each one reached a point where an ever increasing bureaucracy with an ever increasing number of rules simply overloaded the administrator's ability to comply with them, and the systems collapsed.

As complexity increases, the cost of managing the complexity increases at an exponential rate until the system finally collapses.

Modern technology has given us the ability to manage systems that are far more complex. And following a similar curve to Moore's Law, our ability to automate has kept up with our ability to complicate. However, the breaking point will not be the automated systems. Rather, the breaking point will be the human interface and the exacting toll that the income tax system has placed on people to comply.

In our government we have failed to create a checks-and-balance system to mitigate complexity.

We are on an irreversible path, and as complexity of a system increases, the costs associated with it increase exponentially to the point where the costs approach infinity, and collapse is a certainty.

"…as complexity of a system increases, the costs associated with it increase exponentially to the point where the costs approach infinity, and collapse is a certainty."

The level of complexity has now spiraled out of control. Income tax has gone beyond the pale of understandability and exists as nothing more than a confusing blur to the tax paying public. The complexity has reached a point of being irreversible, causing the system to unravel around the edges.

Possible Trigger: A wealthy individual files a well-publicized lawsuit against the IRS citing that the individual, who is far above average intelligence with above average resources at their disposal, is simply unable to comply with the tax code. The lawsuit places the IRS and politicians overseeing the system in the untenable position of having to explain to the country how easy it is for people to comply with the tax code. Wide spread political embarrassment forces change to begin.

2.) New Technology, Demand for Privacy, and Anonymous Money Cash transactions in amounts under $10,000 still are untraceable. For most people, cash is the most recognizable form of anonymous money. However, emerging new technologies such as P2P payment systems, digital coins, and information-based currencies are all dealing in untraceable forms of anonymous money.

The fear of intrusion and the libertarian bent of tech people has created a driving force of both technology and attitudes intent on circumventing the status quo. People guarding the integrity of our money and taxation systems are constantly battling to keep tech rebels and rogue privacy advocates from punching holes into the processes. The righteous anger that they continue to preach has garnered a tremendous following. Most of the general public's hostility towards government stems from the intrusiveness of income tax and other governmental systems.

"Most of the general public's hostility towards government stems from the intrusiveness of income tax…"

Possible Trigger: P2P payment system gains wide acceptance. Proposed legislation initiated by large banks to stop the P2P company meets with a firestorm of protests. Tech community wages war against the banks using hack attacks and boycotts to cause multiple bank failures.

People who directly benefit from the system that helps them should logically have a vested interest in preserving that system. But while that makes sense logically, the reality is that the system itself has mutated into a grossly complicated set of rulings with far too many quirky and often ridiculous components making it impossible for most to endorse. And for most, the system that helps creates the wealth has become the wealthy person's greatest adversary.

"…the system that helps creates the wealth has become the wealthy person's greatest adversary."

Possible Trigger: A group of 200 of the largest tax payers file a class action lawsuit against the IRS for Gestapo-like tactics and invasion of privacy. The lawsuit triggers a national debate between politicians and the wealthiest people in the country.

The primary weapon used to find terrorists has been money tracing. Always an exercise in connecting the dots, the government's ability to trace the flow of money is of paramount concern when it comes to tracking down terrorist cells.

However, when zeroing in on suspicious movements of money, it has become very difficult to separate the terrorists from the people trying to avoid taxes.

"…it has become very difficult to separate the terrorists from the people trying to avoid taxes."

Many of the motivations behind anonymous forms of money center around the fear of intrusiveness associated with income tax. Overly complicated tax laws have left people with fear and uncertainty, and the potential of facing one of those dreaded audits has forced most people to support any tools which will help place barriers between them and the auditor.

Possible Trigger: The U.S. Director of Homeland Security releases a report addressing the multiple-motive confusion factor a leading impediment to national security, recommending sweeping monetary system changes including an overhaul of the tax code.

Bernard Lietaer, the co-architect of the Euro and author of the Future of Money, has been tracking the emergence of alternative currencies around the world and now places the number of currently in existence at over 4,000. He has termed these as "complimentary currencies" because their intent is not to supplant any of the national currencies. Rather, they create a means for consummating a transaction where hard currency is either unavailable or inappropriate.

"…alternative currencies are creating alternative forms of commerce, and un-taxable forms of income."

Irregardless of their intent, alternative currencies are creating alternative forms of commerce, and un-taxable forms of income. Much of the motivation behind dealing in these currencies is to shield personal and business transactions from the prying eyes of government.

Possible Trigger: Further downturns in the economy force widespread use of alternative currencies. The rapid erosion of income tax revenues that we are currently experiencing, along with a sudden increase in people not filing tax returns forces political leaders to find a solution.

Wealthy people are demonstrating a growing desire to resist the confines of country boundaries. Having multiple residences around the world is already common. Their paranoia of being confined, or in this case entrapped, by the minutia-level detail of one country's tax laws, and particularly the intrusiveness of the US income tax system, had led to some very covert lifestyles with planned exits built-in just in case one country becomes too difficult for them to work with.

"…the income of wealthy people, who pay the vast majority of the taxes, has become increasingly difficult to track."

For this reason the income of wealthy people, who pay the vast majority of the taxes, has become increasingly difficult to track.

Possible Trigger: A national study of the top 1,000 wealthiest people clearly shows a growing trend of them leaving the U.S. tax roles in favor of a multi-national lifestyle with rapidly declining tax obligations.

While the concept of taxes has been around since ancient times, the idea of a formalized income tax has not. The first income tax in the United States was signed into law in 1862 by President Lincoln to help pay for Civil War expenses. But the amount was relatively small and during this time 90 percent of all revenues came from taxes on liquor, beer, wine and tobacco. Still, opposition arose and income tax laws were repealed in 1872.

"...before 1862, 90 percent of all revenues came from taxes on liquor, beer, wine and tobacco."

In 1894 the Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created. Again a firestorm of protest arose and the Supreme Court ruled the new income tax unconstitutional. The income tax division was disbanded.

Today's income tax has its roots in the 16th Amendment to the Constitution which was ratified in 1913. The amendment stated, "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. This is when the first 1040 Form was introduced.

Possible Trigger: A presidential candidate rides into office on a "freedom" platform, citing the need to return to the simpler times of the past removing the governmental burden from the people. The candidate, working through a complicated public relations plan, begins to orchestrate a national debate on the topic and proposes a process rather than a solution to end income tax. As the process is defined, the end grows more certain.

Competition in the global marketplace is fierce. For any one country to maintain the lead, the systems within which it operates must aspire to higher and higher levels of efficiencies. Congressman Bob Beauprez, a staunch advocate of tax reform has referred to the complexity of the income tax system as being the single largest drain on our national resources.

"..the complexity of the income tax system is the single largest drain on our national resources."

According to Forbes Magazine, Hong Kong has had a simplified flat tax for a long time and has had the world's fastest growing economy for over 50 years. There are now signs that China may implement a simple flat tax in the near future.

Possible Trigger: The EU launches a common European system for taxation that eliminates income tax in favor of a much simpler, easy to understand tax code. All other countries are forced to re-examine their own tax systems to remain competitive in the global economy.

A recent article in Forbes magazine stated that director level compliance officers are now being paid over $1 million per year to deal with the increasing demands imposed by government.

"Even the professionals who feed off of this overly complex system have grown to detest it."

Even the professionals who feed off of this overly complex system have grown to detest it. Some IRS audits have become undoable, slowing enforcement to an absolute crawl. Costs of both compliance and enforcement will escalate even further until the system reaches the breaking point.

Possible Trigger: Large U.S. corporation announces in a well- publicized release that they will move their corporate headquarters overseas because compliance with the tax code has simply become to onerous.

Every single purchase made in the United States is a tax point decision. Every time people buy a loaf of bread, pack of gum, or put gas into their cars they have to make a decision – is this deductible or is this not? There are literally over a trillion transactions made each year. And each one of these decisions is a judgment call.

This also means that people have to maintain records to bolster support for their decisions. In other words, over a trillion pieces of documentation have to be produced annually just in case some of the items might be tax deductible. And these records have to be saved for at least five years, often much longer.

"…taxes paid into the government each year are based on over a trillion judgment calls by people interpreting their understanding of a tax code consisting of several thousand pages of paper that they have never personally read…or care to read."

To put this in perspective, the taxes paid into the government each year are based on over a trillion judgment calls by people interpreting their understanding of a tax code consisting of several thousand pages of paper that they have never personally read… or care to read.

With staggering levels of detail required to support this system, one has to ask the questions– Why do we care? Why is this important?

Possible Trigger: In a political move to force changes to happen, legislation is enacted requiring the IRS to mail a copy of the tax code and all tax-related judicial decisions to each person who formally contests an IRS ruling. Researchers now estimated the size of these documents to be 54,000 pages, making compliance impossible.

A recent poll by the DaVinci Institute showed that 41% of the population does not think income tax will ever go away....even in 100 years. Many people have resigned themselves to the inevitability of the income tax system. Most grumble and complain about it feeling that the sheer inertia of this giant bureaucracy is like an unstoppable force of nature.

However, change does not happen because everyone gets together first and decides a change is going to happen. Momentum will build quickly around a single event or thought leader. When the general public senses that the end is near, an overwhelming flood of support will rapidly hasten its demise.

Social security is inextricably linked to income tax

How to turn around the trade imbalance...

Rep. Bill Archer, Chairman, House Ways and Means Committee:

"A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."

It's not a matter of if consumption-based sales tax will gain dominance the world over, but when, and which country will lead the charge and which countries will play catch up.

The United States must take the lead.

That's the short list. For more information see fairtax.org or search: "national sales tax" OR "national retail sales tax"

Not mentioned is the fact that 47% of households are freeloaders and pay no income tax at all. Also, there is a HUGE underground economy of cash payments that is never reported to the IRS.

A nice thought, but as unrealistic as pigdog's deep and abiding faith that Congress was going to pass the FairTax bill.

"was". I notice you used the past tense. You should identify the error in that and post a correction.

I agree that it will likely take some significant loss of jobs among our elected leaders to get this done. But I also notice that these same people have been working diligently at making sure that they are as safe as possible in their districts. Gerrymandering by the states coupled with the unconstitutional CFR that they passed into law coupled with election regulations and laws that are verging on the same complexity as the tax code are all aimed at making incumbents as nearly invulnerable to challenge as can be managed. I will be very, very surprised to see a real (and beneficial) change in tax structure anytime in the next 10 years (and I hope I am).

I wouldn't go that far, but Social Security is certainly inextricably linked to income. The government would need to know everyone's income in order to administer Social Security. The "privacy of income" argument from Fair Tax supporters is an illusion.

In the short run, maybe we'd need a system for employers to report a minimal amount of information so that credits earned can be calculated. We could simplify it by just setting a flat level of benefits, indexed to inflation. The increased cost of giving a flat benefit rather than indexing it to earnings would be miniscule in comparison to the surge of tax revenues that would accompany the incredible growth which would follow Fairtax.

In the long run, the Social Security problem would work itself out. A consumption tax would give individuals a large incentive to save rather than spend, so reliance on social insurance would decline and the program could be reduced to a means-tested benefit along with a corresponding general tax cut, and eliminate the need for income reporting on everyone who wants to opt out of the system.

"I wish you luck, but just like social security reform and affirmative action reform this probably isn't going to happen in our lifetimes."

I appreciate your words of support. There is one reason that I think you are wrong as far as timeframe goes and that has to do with the central theme of this article. The author points out the exponential rise in complexity and the unsustainability of that trend. If you look at a graph of the number of pages in the tax system, you will see that the rate of growth is actually increasing. It isn't just maintaining an unsustainable rate of growth.

The other thing that is happening (and the author doesn't even mention this) is that the trade deficit is going through the roof. Our tax system is a major contributor to that. We are on track for a $1 trillion/year trade deficit by around 2010. This is truly uncharted waters: no country in world history has ever had these levels of trade deficit, either on a relative or absolute basis. No economist can tell you when this house of cards will collapse, but they all agree with one thing: this is an unsustainable trend.

There is an upside to the dated nature of this article. I believe the author estimated that the income tax would collapse within 10 years. Since the article was written in October 2003, it seems we've only got to endure another 7.5 years!

They are moving into investments, mortgages....in anticipation that tax preparation will not be a business in the near future.

Good point, but I think companies like H&R Block do this because relatively inexpensive software like TurboTax has really started to take a bite out of their traditional tax preparation business in recent years.

"Good point, but I think companies like H&R Block do this because relatively inexpensive software like TurboTax has really started to take a bite out of their traditional tax preparation business in recent years."

The point that the author makes (and I think he is right on) is that the growth in complexity is overtaking the technology advances. For example, every time I hear statistics about the proportion of taxpayers who have to pay to have their taxes done, the ratio gets higher and higher. That suggests to me that the author is correct in his analysis.

I agree that they will not willingly embrace this change. We'll have to make it clear that they will lose their jobs UNLESS they relieve us of this burden. That may require constituents to become rather active and involved. There is only one thing they understand...and that is the potential loss of their seat in Congress. That's the achilles heel that we must use.

I'm being nice now....I've written, called, faxed....even delivered a "tea party" gift basket to my representative that included a copy of The Fair Tax Book. So far, he's not co-sponsored.

I'm willing to ramp up my activities as needed to get this DONE. When a few of their pudgy pink posteriors find their way into the Potomac....they'll come to see things our way.

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